AUDITING AND ASSURANCE PRINCIPLE This high level of assurance is expressed positively in

the audit report as “reasonable assurance”.

FUNDAMENTAL PRINCIPLES OF ASSURANCE
SERVICES  Absolute assurance is not attainable.

Nature of Assurance Engagement / Service In assurance engagements, absolute assurance is

generally not attainable because of such factors as:
1. Assurance engagements are those engagements in (UNFIT)
which a practitioner expresses a conclusion designed to
enhance the degree of confidence that intended users  Use of judgment;
can have about the evaluation or measurement of a  Nature and the characteristics of the subject
subject matter that is the responsibility of a party, other matter;
than the intended users or the practitioner, against  Furnished evidence that are available to the
criteria. practitioner is persuasive rather than conclusive;
 Inherent limitations of internal control;
A. Assurance services are independent  Testing sample data rather than the entire
professional services intended to enhance or population.
improve the credibility or quality of information
to meet the needs of an intended user, i.e.,
decision making.
B. Assurance refers to the practitioner’s TYPES OF ASSURANCE ENGAGEMENTS
satisfaction as to the reliability of an assertion
1. Reasonable assurance engagements
being made by one party for use by another
party. It is the degree of certainty the  Engagements that provide high, but not absolute, level
practitioner has attained and wishes to convey of assurance.
to intended users.
C. Subject matter information is used to mean  Also called high-level engagements.
the outcome of the evaluation or measurement
of subject matter. It is the subject matter  The objective of a reasonable assurance engagement
information about which the practitioner is a reduction in assurance engagement risk to an
gathers sufficient appropriate evidence to acceptably low level as the basis for a positive form of
provide a reasonable basis for expressing a expression of the practitioner’s conclusion.
conclusion in an assurance report.
 For assurance engagements regarding historical
2. Assurance engagements performed by professional financial information, reasonable assurance
accountants are intended to enhance the credibility of engagements are called audit engagements.
information about the outcome of the evaluation or
measurement of a subject matter against criteria,
thereby improving the likelihood that the information will 2. Limited assurance engagements
meet the needs of an intended user.
 Engagements that provide only a “moderate” or
Objective of Assurance Engagements “limited” level of assurance
The objective of an assurance engagement is
for a professional accountant to evaluate or measure a  The objective of a limited assurance engagement is a
subject matter that is the responsibility of another party reduction in assurance engagement risk to a level that is
against identified suitable criteria and to express a acceptable in the circumstances of the engagement, but
conclusion that provides the intended user with a level of where that risk is greater than for a reasonable
assurance about that subject matter. assurance engagement, as the basis for a negative form
of expression of the practitioner's conclusion.

3. According to the Philippine Framework for Assurance  For assurance engagements regarding historical
Engagements, an assurance engagement is conducted: financial information, limited assurance engagements
are called review engagements.
 To provide a high level of assurance that the
subject matter conforms in all material respects
with identified suitable criteria; or
ASSURANCE ENGAGEMENT RISK
 To provide a moderate level of assurance that
the subject matter is plausible in the  Assurance engagement risk is the risk that the
circumstances. practitioner expresses an inappropriate conclusion when
the subject matter information is materially misstated.
 Reasonable assurance is achieved if assurance  The level of assurance engagement risk is higher in a
engagement risk is reduced to an acceptably low level limited assurance engagement than in a reasonable
(close to zero). assurance engagement because of their different nature,
timing or extent of evidence gathering procedures.
 For assurance engagements regarding historical
financial information in particular, reasonable assurance
engagements are called audit engagements.
NOTES ON THE TYPES OF ASSURANCE
An audit engagement is an assurance engagement that ENGAGEMENTS
provides a high level of assurance that the financial
statements are free of material misstatements Components of Assurance Engagement Risk:

1. Risk of material misstatement

  The risk that the subject matter information is Specific engagement standards may include
materially misstated. additional requirements that need to be satisfied
 Consist of the following: prior to accepting an engagement.
a. Inherent risk - the susceptibility of the
subject matter information to a material ELEMENTS OF ASSURANCE ENGAGEMENTS
misstatement, assuming that there are no 1. Not all engagements performed by practitioners
related controls. are assurance engagements.
b. Control risk - the risk that a material 2. An assurance engagement must have the
misstatement that could occur will not be following elements:
prevented, or detected and corrected, on a
timely basis by related internal controls. A. Criteria Suitable for the Engagement;
2. Detection Risk B. Proper Subject Matter appropriate for the
The risk that the practitioner will not detect a engagement;
material misstatement that exists. C. Appropriate and Sufficient evidence;
D. Three party relationship involving a:
(1) Practitioner;
(2) a responsible party; and
TYPES OF ASSURANCE ENGAGEMENTS –
(3) intended users
STRUCTURE
E. Yield a written assurance report in the form
A. Assertion-based engagements appropriate to a reasonable assurance
 evaluation or measurement of the subject engagement or a limited assurance
matter by the responsible party, and the engagement.
subject matter information in the form of an
assertion by the responsible party is made
A. Suitable Criteria
available to the intended users.
 The practitioner’s conclusion can be worded Criteria refer to the standard or benchmark used to
in terms of the responsible party’s assertion. evaluate or measure the subject matter of an assurance
 also known as attestation engagements. engagement.
 Examples: Audit engagements, Review
engagements Suitable criteria exhibit the following characteristics:

 Relevance – relevant criteria contribute to

B. Direct reporting engagements conclusions that assist decision making by the
 the practitioner either directly performs the intended users.
evaluation or measurement of the subject matter  Completeness – criteria are sufficiently
or obtains a representation from the responsible complete when relevant factors that could affect
party that has performed the evaluation or the conclusions in the context of the
measurement that is not available to the engagement circumstances are not omitted.
intended users.  Reliability – reliable criteria allow reasonably
consistent evaluation or measurement of the
The subject matter is provided to the intended users
subject matter when used in similar
in the assurance report.
circumstances by similarly qualified practitioners.
 Neutrality – neutral criteria contribute to
ASSURANCE ENGAGEMENT ACCEPTANCE conclusions that are free from bias.
 Understandability – understandable criteria
A practitioner accepts an assurance engagement contribute to conclusions that are clear,
only where the practitioner’s preliminary knowledge comprehensive and not subject to significantly
of the engagement circumstances indicates that different interpretations.
relevant ethical requirements such as
independence will be satisfied and that the Two types of criteria:
engagement exhibits all of the following
characteristics: 1. Established criteria
- those embodied in laws or regulations or issued
1. The subject matter is appropriate. by authorized or recognized bodies of experts
that follow a transparent due process.
2. The criteria to be used are suitable and are
2. Specifically developed criteria
available to the intended users.
- those designed specifically for the purpose of
3. The practitioner has access to sufficient the engagement.
appropriate evidence to support the practitioner’s
conclusion. B. APPROPRIATE SUBJECT MATTER
4. The practitioner’s conclusion, in the form Subject Matter refers to the information to be evaluated
appropriate to either a reasonable assurance or measured against the criteria. Subject Matter
engagement or a limited assurance engagement, is Information refers to the outcome of the evaluation or
to be contained in a written report. measurement of a subject matter.
5. The practitioner is satisfied that there is a rational Requirements:
purpose for the engagement. If there is a significant
limitation on the scope of the practitioner’s work, it  Identifiable;
may be unlikely that the engagement has a rational  Capable of consistent evaluation and
purpose. measurement against the identified criteria;
  It is in a form that can be subjected to Appropriateness is the measure of quality of
procedures for gathering sufficient appropriate evidence, that is, its relevance and reliability. The
evidence to support a reasonable or limited reliability of evidence is influence by its source and
assurance conclusion, as appropriate. by its nature.

Forms of subject matter The sufficiency and appropriateness of evidence are

interrelated. However, merely obtaining more
 Financial performance or conditions evidence may not compensate for its poor quality.
For example, historical or prospective financial
position, financial performance, or cash flows
D. THREE PARTY RELATIONSHIP
- for which the subject matter information may be
the measurement, presentation and disclosure 1. Practitioner – the person who provides the
represented in the financial statements. assurance to intended users about a subject
matter that is the responsibility of another party.
 Non-financial performance or conditions This is the CPA in public practice that performs
For example, the performance of an entity the assurance engagement.

- for which the subject matter information may be The term practitioner is broader than the term
key indicators of effectiveness and efficiency. auditor as used in professional standards which only
refer to practitioner performing audit or review
 Physical characteristics engagements with respect to historical financial
information.
For example, capacity of a facility
2. Responsible party – the person or persons who
- for which the subject matter information may be
are responsible for the subject matter in a direct
a specifications document.
reporting engagement or the subject matter
 Systems and processes information and may be the subject matter in an
assertion-based engagement.
For example, an entity’s internal control or IT system
3. Intended users – are the person, persons or
- for which the subject matter information may be
an assertion about effectiveness. class of persons for whom the practitioner
prepares the assurance report. They are the
 Behavior users to whom the practitioner usually
addresses the report.
For example, corporate governance, human
resource practices and compliance with regulation
- for which the subject matter information may be E. WRITTEN ASSURANCE REPORT
a statement of compliance or a statement of
effectiveness. A written assurance report should be in the form
appropriate to a reasonable assurance engagement or a
limited assurance engagement.
C. SUFFICIENT APPROPRIATE EVIDENCE

The practitioner shall plan and perform the Type or level of Form of Example:
engagement with an attitude of professional assurance: conclusions:
skepticism recognizing the circumstances may exist
that caused the subject matter information to be
materially misstated. Reasonable Positive form of “In our opinion,
assurance expression of the internal control
An attitude of professional skepticism means the practitioner's is effective, in
practitioner makes a critical assessment, with a conclusion all material
questioning mind, of the validity of evidence respects based
obtained and is alert to evidence that contradicts or on VCL
brings into question the reliability of documents or criteria.”
Limited Negative form of Based on our
representations by the responsible party. An
assurance expression of the work described
assurance engagement rarely involves the
practitioner's in this report,
authentication of documentation, nor is the conclusion nothing has
practitioner trained as or expected to be an expert in come to our
such authentication. attention that
causes us to
Sufficiency is the measure of the quantity of
believe that
evidence. internal control
The quantity of evidence is affected by: is not effective,
in all material
(a) The risk of the subject matter information being respects, based
materially misstated (the greater the risk, the on VCL criteria.
more evidence is to be required); and
(b) The quality of such evidence (the higher the ATTESTATION SERVICES
quality, the less may be required).
Attestation services are a type of assurance service in
which a practitioner is engaged to issue a written
communication that expresses a conclusion about the
reliability of a written assertion that is the responsibility of
another party.

Attestation generally refers to an expert’s written

communication of a conclusion about the reliability of
someone else’s assertions.

The subject matter of attestation services include:

 Financial and non-financial in nature

 Future oriented financial information (such as the

examination of prospective financial information)

 Management discussion and analysis

 Effectiveness of internal control

 Compliance with statutory, regulatory, and contractual

obligations

II. NON-ASSURANCE ENGAGEMENTS

Non-assurance engagements are those that do not

result in the practitioners expression of a conclusion that
provides a level of assurance, whether negative
assurance or other form of assurance. The practitioner
does not convey to the intended users any assurance as
to the reliability of an assertion.

The Practitioner's primary purpose for performing non-

assurance services is to provide advice and technical
assistance that will enable a client to conduct its
business more effectively.

Examples of non-assurance engagements

A. Related services, such as:

1. Agreed-upon procedures engagements, and
2. Compilations of financial or other information
engagements

B. Tax services (such as the preparation of tax

returns where no conclusion conveying
assurance is expressed).

C. Consulting (or advisory) engagements, such as

management and tax consulting.